Former US Senator Bill Bradley identifies the four causes of the financial crisis from the perspective of the law… and laid out this simply you realize it won’t be that hard to repair the damage and return our nation to some rationality in the regulation of financial institutions and markets.

Reblogged from Washington’s Blog…, summarized from the New York Times Review of Books…

~~~~ “Bradley also gave a very succinct explanation for 4 of the main factors which caused the crisis:

As we look at the future, we also have to look at the mistakes policymakers made in the last ten years. It’s not news that people are greedy. But we made conscious decisions not to put limits on that natural human impulse. What were the mistakes?

1.

In 1999, we allowed investment banks, banks, insurance companies to combine: we eliminated the Glass-Steagall Act, which prohibited commercial banks from operating as investment banks. Why was Glass-Steagall put into law? Because the last time we didn’t limit greed we got into trouble, the Great Depression.

2.

The second mistake was in 1999, the explicit decision by the Clinton administration and Congress not to regulate derivatives, in particular credit default swaps. In 2002 they were worth $1 trillion and today they’re worth $33 trillion, and that decision not to regulate derivatives created the following sequence: you have mortgages; then a thousand mortgages are packaged and sold as a mortgage-backed security; a thousand mortgage-backed securities are packaged and sold as a collateral debt obligation [CDOs]; then a thousand collateral debt obligations are packaged and sold as a CDO squared; and insuring each one of those bundles are credit default swaps, which are a part of that $33 trillion. And our government deliberately decided not to regulate this chain of investments.

One result was that the 374 people in the London office of AIG who were responsible for AIG derivatives destroyed a company that had 116,000 employees in 120 countries. Why? Because there was no regulation at all.

3.

The third decision was in 2004. The SEC allowed banks to go from 10 to 1 leverage to 30 to 1 leverage. And guess what? Once they were allowed to do it, they did it. So if we’re going to look at the future, we might think of undoing those three mistakes.

4.

Finally, we might want to remember that the chairman of the Federal Reserve is supposed to remove the punch bowl from the party when the party gets out of control. And that did not happen in the Greenspan years. The opposite happened.”~~~~